Non-Fungible Token (NFT) to provide exclusivity. What’s next?

Written by Alan Kardec — Director of Product Development and Innovation at Moeda Seeds. Originally posted on his LinkedIn page (PT-BR)

The image used for this article is a rather interesting meme of a stripped-down and stylish representation of the Mona Lisa painting — almost waiting for something to happen. While it remains in its rightful place, albeit with a new perspective (defi)ned in a simple gesture of peacefulness, something quite unnerving has been taking place in the world of decentralized finance (DeFi).

Since the overwhelming success of Initial Coin Offerings (ICO), thanks to the Ethereum Request Comment 20 (ERC-20) standard, new cryptographic concepts have emerged to simplify large-scale collaboration, leading to the emergence of economic, social and sustainable alternatives for supply chain management, payment methods, international financing, energy markets, disruptive currency exchange, notary services, and many others.

The ERC-20 standard considerably streamlined how business rules were translated into smart contracts, disruptive, decentralized and secure modelling, including the innovative feature of immutability offered by blockchain technology.

The developer community agreed upon a common interface for fungible tokens that is divisible and non-distinguishable to ensure interoperability — as did society — to represent value and, in some cases, wealth.

Nevertheless, conceptual advances, the need to close gaps in blockchain protocols and the burgeoning opportunities for services based on decentralized finance (DeFi) introduced a new cryptographic player: non-fungible tokens (NFT).

Using the ERC-721 standard, non-fungible tokens are unique, can’t be split or merged and open up a variety of potential new uses, particularly improving the tokenization of individual assets by representing them as exclusively digital.

Accordingly, based on the hypothesis of usefulness to generate value and wealth, NFT could transform the collectables market (estimated at over $200 billion) with highly disruptive business rules and perspectives. And it’s not just this market, but other niches including arts, music, culinary experiences, different types of events and tourism.

However, a deeper dive needs to be done on the use cases of these tokens, including best practices, experience in projects that focus on utility and value, scalability and insights for developing blockchain-based software. We may indeed be in a new bubble, but like many others, the usefulness of NFT will not be eroded or become obsolete. There is a lot to organize, leverage and showcase in the crypto market.

Generally speaking, fungible is something that can be replaced by something similar with the same quality, quantity and value, meaning that two parties can exchange the same quantity without any gain or loss. While fungibility is an integral feature of any currency, non-fungibility is the opposite, as each token is distinguishable and cannot be split or merged.

Another interesting detail concerns the implications for tracking the ownership of these tokens because each NFT needs to be tracked separately. As such, it has a unique global identity, the ability to be transferable and can optionally include metadata. These tokens have a specific purpose: to represent ownership over digital or physical assets.

As mentioned before, I suggested the example of collectable items, because they are considered assets with strong emotional appeal and have become an investment and part of a global market. By becoming rare and more desirable, collectable items have the potential to appreciate over time.

But something that really stands out in this creative journey of computing is the creation of value. We are witnessing a considerable change in the way the economy adapts to DeFi’s new disruptive precepts. The models are audacious and there is no experience in this game, merely a pure execution of the possibilities. It’s known, or at least we try to regard it as a fact, that DeFi is far beyond the conventional mechanisms of the economy, and its way of approaching the management of financial services considerably breaks down all the paradigms that were previously resistant to technological changes.

The scarcity of an NFT and the claim of an exclusive sale make the “tokenized object” an attractive proposition for anyone interested in owning something unique. This could perhaps typify one of the next utilities of value that does not necessarily involve owning a work of art or a virtual home, but the intrinsic value that this market will generate by leaps and bounds.

And then, what lies ahead? I don’t have an answer right now, just a bit of food for thought. If there is a promise of exclusivity, of something unique that can be converted into a token fully suited to the context, then this could be a major key for new business models to emerge using ERC-721.

We could maybe wait for NFT to emerge from other Ethereum-compatible blockchains so that they do not continue in the same place afterwards. Finally, we could also expect the so promised decentralization to be fully conceived from several different blockchains, ultimately reaching its full potential.

And so, Monalisa’s meme carries on, literally translated into bits.